The financial markets have been expanding day by day with new technologies, markets, and instruments. A trader can always learn and find something new for earning from the markets. There are various trading instruments and markets such as stock, indices, forex, precious metals, commodities, and cryptocurrency.
For succeeding in the trade of instruments of these markets, traders use modes like trading tools, trading platforms, trading strategies, analysis, predictions, etc. With the article, we’ll be focusing on the trading strategies in the forex market, specifically day trading strategies. There’s no one trader who trades without the help of these tools and indicators.
However, it becomes difficult for beginners to understand the market and their trading strategies. Therefore, we have discussed forex day trading strategies in detail to help traders focus on one significant trading strategy of the market.
Forex Trading
Forex market is the online trading of currency pairs of different countries. The investors can trade in the forex market for 24 hours without any interference. Then, traders buy and sell the currencies to earn money from the difference of the currency values because of market factors.
The currency market is a decentralized market with trade available globally anytime and anywhere. Traders can access the market when they want to invest from Monday to Friday. Moreover, the trading works on the system of either an over-the-counter market or the interbank system.
A trader can choose the one that suits their market needs; the OTC market is trading via online brokers or privately, whereas interbank forex trading involves banks executing the trades on behalf of clients or themselves. In addition, forex traders can invest in the markets with reputed and regulated brokers like InvestBy, and it does not include any exchanges for the trade.
Base and Quote Currency
In forex trading, investors trade with currency pairs as one is bought and the other is sold simultaneously. Thus, the market maintains its liquidity and gives investors several opportunities to trade. The currency pairs have two types of currencies, the base, and the quote currency. Investors should be aware of these terminologies for investing properly and having high profits.
The base currency is the top of the first currency of the pair and has a high market value. In comparison, the quote currency is the second currency of the pair with a lower market worth than the base currency. Traders analyze the market value of the currency pair as the one unit of the base currency is decided on the basis of the market value of one quote currency.
The currency pairs are, moreover, coded in three letters for easy trading of investors. Such as GBP is the currency of the United Kingdom, and USD is the currency of the United States, etc.
Forex Market Types
The forex market is generally split into three types; spot, forward, and future. Traders can invest in any of the markets to earn money from forex trade. Primarily, the spot market is the most used forex market, with the futures market being the next. Here, we have the three explained for easy investing in the forex market:
The spot market is the instant trade market of forex, where investors can buy and sell goods and services for cash. Therefore, the market is called a cash or liquid market. Traders can buy and sell the goods for cash with immediate effect; the trade can last for two business days. Traders can invest in several other financial instruments with the spot market.
The forward market is the buying and selling of currency pairs with a specified date and price. Traders decide the price of the contract and its time of maturity in advance for easy trade. However, the market does not have any obligation and could have a range of dates.
The Futures market is similar to the forward market, but it differs as traders can buy and sell the currency pairs on a certain date and price but do not have the privilege of having a range of dates for the trade. The agreement of the futures market is legally binding.
Day Trading
Before jumping to forex day trading strategies, readers should know what day trading is? Day trading is a style of investing in the markets where traders with good market knowledge and understanding can earn. Traders can invest only within a day’s trade and hold either one market position or multiple positions, depending on their requirements.
Day trading is also termed intraday trading, and mostly the strategy is used by professionals of the market. Traders have to make quick trade decisions to take advantage of the market opportunities. It is a useful strategy that is used by several professional traders. The investment is short-term and involves huge profits if the trade goes well.
The traders who use the day trading strategies are called day traders and have the advantage of being their own boss. In addition, they have several strategies that could be used for investing. It is not an easy job, and traders need to analyze, research, and practice trade before using such trading strategies.
Day trading strategies have become popular in the UK for some years now, and traders use them with advanced technology and software. They have trading platforms, analysis tools, advanced charts, patterns, etc. These all help them analyze the market movements and quickly trade for maximum profits.
Investors usually earn from the rise and fall of the markets due to the volatility. They take benefit of the market instruments with their quick judgments and have profits.
Trading Strategies
Trading strategies are the fixed plans that are designed by the investors in advance for achieving their desired goals. The strategies could be for the long or short term depending upon the requirement of the trade instrument and investors. The trading strategies have four characteristics that make them popular among the traders.
The characteristics of trading strategies are:
- Consistency
- Verifiability
- Objectivity
- Quantifiability
Traders use the systematic methodology to buy and sell currency pairs or other financial instruments. The strategy has its rules that are predefined by the traders for making accurate decisions. The investors make simple or complex trading strategies based on the market capital, technical and fundamental analysis, investment style, risk tolerance, and other factors.
In addition, traders keep re-evaluating the strategies as per the market changes and trade requirements.
Forex Day Trading Strategies
A trader has many options to invest in the forex market, there are forex trading strategies such as scalping, relative strength index, oscillators, etc., for a profitable investment, or a trader may use several together combined for earning profits and getting indications at the correct time.
Day trading is one of the critical forex trading strategies which is used by forex market experts. The strategy is different from other trading strategies, and it allows traders of the forex market to only stipulate, and trades do not have an overnight trade.
A trading style of forex investors, day trading strategies, has the following types of strategies included in it:
- Swing trading
- Scalping
- Money flows
- Trend trading
- Mean reversion
Here, we have each one of these explained in detail for easy understanding and use of the beginners of the forex day trading strategies.
Swing Trading
The forex market is volatile and keeps fluctuating the price of the currencies. To analyze the market and have the right decision made, forex traders use the swing trading strategy. In the strategy, traders invest in the short-term markets and take benefit of the change in the price patterns.
Swing trading allows traders to invest in the market for a period of time. Traders can hold a market position for a week, hours, or an hour as per need. Moreover, it works on the assumption that the prices of the market never follow one direction in the trend.
Traders earn from the ups and downs of the trading instrument within the short term. They concentrate on the small reversals taking place in the forex market and, with the help of tools, predict the changes in advance. Thus, making a small profit from the investment.
The swings formed on the charts are studied by the traders and analyzed thoroughly for earning good returns.
Scalping
Another significant day trading strategy is scalping; this is also a short-term strategy where investors can trade to have frequent profits. Traders invest in the currency pairs using the scalping strategy, where they hold the market position for not more than an hour. This gives traders small regular profits from the trades.
In scalping, traders have multiple investments in a day, and combined investments of the day make a good profit for the trader. The day trading strategy uses the theory that traders invest in small trades and make small profits to have high profits in the long run.
However, the strategy needs the investors to have a quick exit strategy for the market is volatile, and the profits can become lost within seconds. Hence, traders need to be fast with their investments and market exit to limit the loss.
The scalpers usually close their market positions within the day and avoid overnight charges.
Money Flows
Money flows is the day trading strategy indicator where traders use it for analyzing the position of the currency traded. The oversold and overbought positions are studied using the price and volume of the currency and do not only depend on the price movements.
The strategy compares the number of trades of the previous day to the current day. This helps them determine whether the money flow from the currency traded was positive or negative. The chart of money flow indicates on the scale of zero to hundred.
If the chart shows a reading of 80 or above, then the trader has an overbought market condition, and the trader sells the currency in the market. Whereas, if the reading of the chart is 20 or below, it is an oversold condition, and traders buy during such times.
Trend Trading
Trend trading strategy is the easiest way to analyze the market prices of the currencies traded and invested. The trend traders study the price direction or trend of the market and then invest. They buy and sell the currencies depending on the direction of the trend.
When the market has an upward trend, then traders go for long market investments as the market shows higher highs, and they buy the currency in such situations. In contrast, if the market represents a downward trend, there are lower lows, and traders sell the currency traded for the short term.
The trend trading strategy could be used for long or short terms and, therefore, is not necessarily used for day trading. It could be used in other trading strategies as well. However, if a day trader uses the trend trading strategy, they close their market position with the day.
Mean Reversion
The day trading strategy is based upon a theory that the prices and other measures of the currency move back towards their historical mean. The other measures may include price-to-earnings ratio, earnings per share, etc.
The strategy is based on technical analysis and checks on the currency pairs that have shown a recent shift in their performance; that is, the currency has differed from its historical mean. The users of such a strategy take advantage of the return back to the normal position.
Conclusion
Forex markets are uncertain, and using the day trading strategies for its trading requires years of expertise. With the article, we have provided readers with the details of the forex market, day trading, and how the day trading works if used in the forex market. They can use the forex day trading strategies such as mean reversion, scalping, swing trading, money flows, and trend trading to enjoy high profits from short-term trades.
However, the traders need to be careful with the strategy as it has fast changes taking place and traders have to be correct and quick with the trade for earning profits. This needs market research, analysis, understanding, and a lot more.
